Tennant Company — Q1 2018 Form 10-Q
Business context and reporting period. Tennant designs, manufactures and sells commercial cleaning equipment, parts, consumables, services and related products. This unaudited filing covers the three months ended March 31, 2018, compared with Q1 2017. Results include IPC Group, acquired in April 2017.
Key financial results
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Net sales | $272.8 million | $191.1 million |
| Gross profit / margin | $110.6 million / 40.5% | $79.7 million / 41.7% |
| Operating income (loss) / margin | $10.4 million / 3.8% | $(2.7) million / (1.4)% |
| Net income (loss) attributable to Tennant | $3.3 million | $(4.0) million |
| Diluted EPS | $0.18 | $(0.22) |
| Operating cash flow | $5.5 million | $(11.1) million |
- Sales growth: 42.8% year over year, comprising 33.2% acquisition contribution, 6.5% organic growth (5.0% volume and 1.5% price), and 3.1% favorable currency impact.
- Cash and liquidity: Cash and cash equivalents were $54.0 million at March 31, down from $58.4 million at year-end; current ratio was 1.8 and working capital was $193.3 million.
- Debt: Debt principal totaled $379.4 million, including $300 million of 5.625% senior notes due 2025 and credit-facility borrowings. The company reported $180 million of unused revolving capacity before letters of credit and bank guarantees, or approximately $175.1 million afterward. It was in compliance with financial covenants; debt-to-capital was 55.0%.
- Cash movements: Investing activities used $4.3 million, including $3.5 million of net capital expenditures and $1.0 million for a technology license. Financing activities used $6.9 million, including $3.8 million in dividends and $4.0 million in debt payments. Cash, cash equivalents and restricted cash declined $4.4 million.
Changes versus the prior comparable period
- Sales rose substantially, led by IPC, with additional organic and currency growth. EMEA sales increased 166.9%, heavily reflecting the acquisition; Americas sales rose 13.9% and Asia Pacific 42.5%.
- Gross margin declined 120 basis points. Management cited IPC sales mix (about 66 basis points of pressure), a Coatings inventory write-down (40 basis points), and channel and regional mix, partly offset by improved manufacturing and service operations.
- Operating results improved by $13.0 million, moving to profit. The comparison benefited from the absence of Q1 2017 restructuring and IPC acquisition charges; Q1 2018 included IPC operating profit but also acquisition-related amortization and costs.
- Interest expense increased to $5.7 million from $0.8 million, primarily because of debt incurred to fund the IPC acquisition. Operating cash flow improved from a use of cash to a source of cash.
Outlook, commentary and risks
- Management expected 2018 pricing actions to add 1%–2% to full-year net sales, with minimal gross-margin impact as increases were intended to offset inflation. Full-year R&D expense was expected at 3.0%–3.5% of net sales.
- Tennant continued investment in new products and sustainable technologies, including its Brain Corp relationship; it planned to introduce its first autonomous floor-care machine later in 2018. New products launched in Q1 included the T600 scrubber series.
- Management cited sales growth from strategic accounts and increased parts and service sales, while noting lower distribution sales in parts of EMEA. DSO was 65 days and inventory days on hand 98, each two days higher than at year-end.
- Risks highlighted include acquisition integration and related internal-control work at IPC, competition, raw-material availability and costs, innovation execution, foreign-exchange movements, cybersecurity and business interruptions, and generating cash to meet debt obligations. The filing reported no material change in market risk or risk factors and no material pending litigation beyond routine matters.
- Tax Act accounting remained subject to further IRS guidance and estimates. Q1 effective tax rate was 24.6%; the company stated it generally intended to reinvest foreign-subsidiary earnings. It reported $7.0 million of unrecognized tax benefits and an ongoing IRS examination for 2015, with other state and foreign examinations.
- Operating-lease accounting changes were scheduled for adoption in fiscal 2019; Tennant was evaluating their impact. The filing provided no full-year earnings or sales-growth guidance.
Important facts for investors to verify
- How much future sales and earnings growth is organic versus attributable to IPC and foreign exchange, and whether IPC integration delivers expected benefits.
- Whether gross-margin pressure, including product/channel mix and the Coatings write-down, persists as pricing actions and operational improvements take effect.
- Cash conversion and working-capital trends, particularly inventory levels, DSO and the ability to generate cash for debt service.
- Debt covenant headroom, scheduled and voluntary repayments, and the effect of interest expense and restrictions on dividends or share repurchases.
- Progress in documenting and implementing IPC financial-reporting controls, and resolution of Tax Act estimates and tax examinations.